When taking out a loan for the first time, borrowers may be confused about which factors are key when choosing a loan or even thinking, how do cash advances work?
This guide will help first-time borrowers navigate the sometimes confusing world of taking out a loan.
How can a loan affect the borrower's credit score?
In general terms, credit bureaus prefer borrowers to have a "mix" of types of credit. So, a person who has credit cards taking out a loan for the first time may see a credit boost, as this represents more variety in types of credit.
There are important exceptions to keep in mind. Some lenders don't report loans to credit bureaus, which means that both positive, on-time payments, as well as any potential missed or late payments, won't have an impact on your credit score.
For lenders that do report to credit bureaus, a loan can further boost credit history when payments are consistently on time but can quickly damage one's credit score if payments are late or missed.
What's a repayment plan that is affordable?
When taking out a loan, the first two numbers that come to mind may be the principal that's being borrowed and the associated finance charge.
While those are important factors when choosing a loan, different repayment plans can make loans with comparable interest rates and principals much more or less affordable.
Choosing a longer repayment plan means that the loan will be broken down into smaller chunks and paid off over a greater length of time. This could lead to more overall interest paid on the loan compared to a shorter repayment plan, but that's not always the case. It's important to consider the total finance charge and repayment amount when selecting a loan amount and repayment term.
However, that difference could be minor compared to the potential penalties associated with missed and late payments, which can trigger a higher interest rate in addition to fees and damage to the borrower's credit score. Choosing a loan with a repayment plan that fits into the borrower's budget is key.
How fast can the loan be funded?
How quickly lenders move will depend heavily on what kind of loan is being discussed. Larger value loans such as mortgages and student loans typically involve a lot of documentation and verification, so they may take more time to process.
Personal loans vary in regards to how long funding takes. Traditional brick-and-mortar banks may take longer to process applications and disburse funds, while many online loans have instant application approvals and even same-day funding.
What fees are involved?
Fees are a hidden expense that can make loans with low interest rates more expensive than they first appear. Origination fees, for example, are typically charged as soon as a loan is funded. While it's hard to find a lender that completely avoids fees, the exact cost of fees varies.
Prepayment penalties are another common fee that lenders may charge when a borrower wants to repay their loan early. Unlike origination fees or late fees, only some lenders charge prepayment penalties. It may not be top-of-mind for borrowers at first as this penalty only applies at the end of your loan, but it's worth seeking out a lender that skips these fees altogether.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: Everything First-Time Borrowers Should Know Before Taking Out a Loan
